Council ordered payment without arbitration. Supreme Court: nullity

A supplier got a payment order without any arbitration. The council skipped two mandatory steps. The Supreme Court just said — that order is a nullity.

On a single morning in August 2012, a Rajasthan-based facilitation council passed a payment order worth over Rs. 1.7 crore against a state electricity utility that had never appeared before it. The council did not attempt to mediate. It did not appoint an arbitrator. It simply issued a demand. Nine years later, the Supreme Court called the order legally dead — a nullity — and warned that no council can skip the two-step process the law requires.

When the council passed an order on the first date

Jharkhand Urja Vikas Nigam Limited, the successor of the Jharkhand State Electricity Board, had entered into a contract with M/s Anamika Conductors Ltd., a Jaipur-based supplier of ACSR Zebra Conductors. The supplier delivered the goods. The bills went unpaid. Anamika claimed it was a small-scale industry and approached the Rajasthan Micro and Small Enterprises Facilitation Council, a body set up under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, to recover roughly Rs. 74 lakhs as principal and another Rs. 91 lakhs as interest.

The council issued notices and summons to Jharkhand Urja. The company did not appear. On the very first date of hearing — August 6, 2012 — the council passed an order directing full payment. It did not attempt conciliation (a structured mediation process where a neutral third party helps the sides reach a settlement). It did not initiate arbitration (a formal dispute resolution process where an arbitrator issues a binding decision). It simply ordered payment.

The payment that came too late

Jharkhand Urja later verified its records and paid Rs. 63.43 lakhs to the supplier. But the council's order remained on the books. The supplier then tried to enforce the order through execution proceedings in Ranchi. A civil judge dismissed that attempt in January 2017, ruling that the Ranchi court had no territorial jurisdiction — the council was in Rajasthan, and the contract was governed by Rajasthan law.

Jharkhand Urja then challenged the council's order itself. It filed a writ petition (a plea asking the High Court to review the legality of a government body's decision) before the Rajasthan High Court. A single judge dismissed it. A division bench dismissed the appeal in December 2017. Both courts held that the council's order was an arbitral award and could only be challenged under Section 34 of the Arbitration and Conciliation Act, 1996 (the provision that allows a party to ask a court to set aside an arbitral award on limited grounds).

Why the High Court was wrong

The Supreme Court saw the case differently. The bench of Justice R. Subhash Reddy and Justice Indira Banerjee examined the MSMED Act's structure and found that the council had violated the most basic requirement of the law.

Section 18 of the MSMED Act lays down a clear sequence. Under Section 18(2), when a dispute is referred to the council, it must first conduct conciliation. If conciliation succeeds, the dispute ends with a settlement agreement. If conciliation fails, then — and only then — does Section 18(3) kick in: the council must initiate arbitration proceedings, following the provisions of the Arbitration and Conciliation Act, 1996. The council cannot combine the two stages. It cannot skip conciliation and jump straight to an order. It certainly cannot skip both and simply issue a payment demand.

"The proceedings under Section 18(2) and 18(3) of the MSMED Act are distinct and sequential," the court held. "The council must first conduct conciliation. If conciliation fails, it must then initiate arbitration. These proceedings cannot be clubbed."

The order that never was

Because the council passed its order on the very first date of appearance without any conciliation or arbitration, the Supreme Court ruled that the order was not an arbitral award in the eye of law. It was a nullity — a decision that has no legal existence from the moment it was made.

This distinction mattered for a practical reason. If the order had been a valid arbitral award, the only way to challenge it would have been through Section 34 of the Arbitration Act, a limited remedy that allows a court to set aside an award only on specific grounds like fraud, bias, or violation of public policy. But if the order was a nullity — something the council had no power to issue — then the writ jurisdiction of the High Court remained available. The High Court could review the order directly, without being restricted to the narrow grounds of Section 34.

The Supreme Court cited its own precedent in Rajkumar Shivhare v. Asst. Director, Directorate of Enforcement & Anr. (2010) 4 SCC 772, which held that an order passed without jurisdiction is a nullity and can be challenged at any stage, including through a writ petition.

What the court ordered

The Supreme Court allowed Jharkhand Urja's appeal. It quashed the council's order of August 6, 2012, and set aside the High Court judgments that had upheld it. But the court did not shut the door on the supplier. It directed the Rajasthan Facilitation Council to take up the dispute afresh — either by conducting arbitration on its own or by referring the matter to an institution or centre providing alternative dispute resolution services.

The supplier's claim for unpaid bills was not dead. The council's shortcut was.

THE PLAY: A facilitation council under the MSMED Act must complete conciliation before initiating arbitration — and any order that skips either stage is a nullity that can be challenged directly in a writ petition, not just under Section 34 of the Arbitration Act.

The council had one job: mediate first, arbitrate second. It did neither. The Supreme Court did the only thing it could — it erased the order and sent the parties back to the starting line.